IGI Logo

Multiple growth engines at play; structurally positive VSF revival positive in the near term; Paint bolsters long-term growth

We believe GRASIM has a compelling structural long-term investment case underpinned by an improving VSF earnings cycle, a stable margin in the chemicals business due to the company’s focus on specialty chemicals, and a long-term growth opportunity in decorative paints. The VSF business is entering a margin recovery phase in 2HFY26, supported by a modest rebound in China pricing, stable pulp costs, and consistently high utilization levels (>90%). These should drive an expansion in EBITDA/kg and margins over FY27–28E. In chemicals, GRASIM’s leadership in chlor-alkali and epoxy resins, coupled with ongoing investments to raise chlorine integration to ~70%, underpins steady revenue and EBITDA growth despite a correction in caustic soda price due to overcapacity. The paints business (Birla Opus), while currently in an investment-led phase, provides a scalable growth optionality in a large and under-penetrated market, with rapid distribution expansion and brand investments positioning the business for medium-term operating leverage once scale is achieved. We reiterate our BUY rating with a TP of INR3,600 based on an SoTP valuation.

VSF margin poised to improve in 2HFY26

* GRASIM is among the leading producers of VSF globally, with an installed capacity of ~880ktpa across its Vilayat and Kharach plants in Gujarat and Nagda in Madhya Pradesh. In addition, a new facility at Harihar, Karnataka, with a total capacity of 110ktpa (Phase 1: 55ktpa), is expected to commence operations by mid-FY27. The company offers a diversified portfolio of regular and specialty fibers, including Modal, Excel (lyocell), and Birla Reviva (recycled CSF). Specialty fibers contribute ~24% of VSF volume in 2QFY26.

* VSF prices have been range-bound over the past two years, primarily due to weak pricing in China, which reflects sluggish textile demand. This also led to an increase in inventories to ~17 days in China in 1HFY26 from 10 days in 1HFY25. However, in 3QFY26, the VSF average price in China increased ~4% QoQ to RMB12,913. In contrast, the pulp prices broadly remained flat QoQ at USD807. With that, we estimate the VSF profit to improve in 2HFY26. We estimate the VSF average EBITDA/kg to increase to INR18.3 in 2HFY26 vs. INR14.4/INR15.3 in 2HFY25/1HFY26. Further, we estimate the average EBITDA/kg of INR20.0/INR21.7 in FY27/FY28 vs. INR16.8 in FY26 (average INR20.1 over FY21-25).

* We estimate GRASIM’s VSF capacity utilization to remain high (+90%) and estimate ~3% volume CAGR over FY26-28E. VSF revenue/EBITDA CAGR is estimated at ~5%/17% over FY26-28E, and EBITDA margin is anticipated to improve to ~11% by FY28 from ~9% in FY26.

Specialty chemicals anchor growth

* GRASIM is India’s largest chlor-alkali producer with 1,505ktpa capacity for caustic soda and 1,029ktpa for chlorine derivatives. The company also has ~246ktpa of specialty chemicals capacity, making it the largest producer of epoxy polymers. The company focuses on high-potential specialty chemicals (mainly epoxy resins and curing agents). It targets to increase chlorine integration to 70% through a combination of investments and strategic partnerships. In the core Caustic Soda business, the strategy remains centered on sustainability and operating efficiency, targeting over 25% renewable energy usage, lower water consumption, and improved cost competitiveness to support long-term profitability.

* GRASIM is setting up an ECH plant (50ktpa) and a CPVC resin plant (phase I of 50ktpa) at Vilayat to increase its chlorine derivatives capacity to 1.2mtpa by FY28E from 1.0mtpa currently. These initiatives will help the company to achieve its chlorine integration target of ~70% vs. ~64% currently.

* Caustic soda price broadly remained flat QoQ in 3QFY26. We estimate the price will hover around that range in the near term due to overcapacity. In the chemicals segment, we estimate revenue/EBITDA CAGR of ~12%/13% over FY26- 28. We estimate the EBITDA margin will be range-bound at ~15% over FY27-28.

Birla Opus reshapes the paint landscape; focuses on scale before profitability

* After the entry of Birla Opus, growth momentum across established players has moderated. Asian Paints has posted multiple quarters of YoY decline in revenue and EBITDA decline, marking a sharp deviation from its historically stable growth trajectory. Berger Paints has also experienced a slowdown, with revenue growth moderating to low single digits across most quarters. This reflected the impact of heightened competition in the decorative paints market (Exhibits 2 & 3).

* Historically, Asian Paints has dominated the Indian decorative paints industry, supported by superior distribution density, strong dealer loyalty, brand equity, and a highly efficient supply chain, which enabled consistent growth and steady market share gains over several decades. Berger Paints has traditionally operated as a strong challenger, leveraging regional strengths and focused execution to sustain above-industry growth. The recent moderation in growth for both established players highlights the extent of disruption following Birla Opus’ entry.

* Birla Opus continues to operate in an investment-led phase, focusing on scale and market share gains over near-term profitability. Following the commissioning of its 1,332 MLPA Kharagpur plant, Birla Opus has rapidly scaled up operations and is now among the leading players in India’s decorative paints industry in terms of brand visibility. Operating in an industry estimated at ~INR720b, Birla Opus accounts for ~24% of organized industry capacity, providing a solid platform to support scale-led growth over the medium term. The long-term demand outlook remains favorable, driven by rising disposable incomes, increasing urbanization, and sustained government focus on housing and infrastructure.

* To accelerate penetration in a dealer-led market characterized by strong brand loyalty, it has adopted an aggressive strategy, including free tinting machines and extended credit terms. This has enabled rapid expansion of its distribution footprint to over 10,000 towns and ~50,000 dealers, with increasing depth across Tier-2 and Tier-3 markets.

* The company has further expanded its product portfolio to 190+ products and 1,750+ SKUs across six decorative paint categories, supported by multiple new launches. Beyond the dealer channel, Birla Opus has built a strong application ecosystem, with over 600,000 contractors and painters now associated with the brand, increasingly positioning it as a preferred choice. ? On the brand-building front, the company launched a new brand film aligned with its core philosophy of ‘Duniya Ko Rang Do’, continuing the “Opus Boy” narrative. This follows the earlier ‘Naye Zamane ka Naya Paint’ campaign featuring Vicky Kaushal and Rashmika Mandanna, which played a key role in driving initial brand awareness. Continued investments in brand communication underscore Grasim’s long-term focus on building a differentiated and scalable decorative paints segment.

Valuation and view

* GRASIM has commissioned all six plants in the Paint business. It is also receiving a healthy customer response. The overall traction in the Paint business is better than our expectations. GRASIM has seen a steady improvement in revenue and market share over the last few quarters. Though the losses in new business verticals appear to have peaked now, a reduction in losses over the next few quarters will be a critical monitorable.

* We expect the combined EBITDA of VSF and chemical business segments to post a CAGR of ~13% over FY26-28. We estimate the chemical segment’s OPM at ~15% in FY27/FY28, similar to the FY26 level. We further estimate an EBITDA/kg of INR20.0/INR21.7 in FY27/FY28 vs. INR16.8 in FY26.

* We reiterate our BUY rating with a TP of INR3,600, as we value its: 1) holdings in listed subsidiary companies by assigning a discount of 35%, 2) standalone business at 6x FY28E EV/EBITDA, 3) paint business at 2.0x of investments, 4) B2B e-commerce at 1.5x of FY28E revenue, and 5) renewable business at 10x EV/EBITDA.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412